Good afternoon, ladies and gentlemen, and welcome to Ares Commercial Real Estate Corporation's Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Wednesday, February 12th, 2025. I will now turn the call over to Mr. John Stilmar, Partner of Public Markets Investor Relations. Please go ahead, sir.

Good morning everyone and thank you for joining us on today's conference call. In addition to our press release and the 10-K that we filed with the SEC, we posted an earnings presentation under the Investor Resources section of our website at www.arescre.com. Before we begin, I want to remind everyone that comments made during the course of this conference call and webcast as well as the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the words such as anticipates, believes, expects, intends, will, should, may, and similar such expressions. These forward-looking statements are based on management's current expectations of market conditions and management's judgment. These statements are not guarantees of future performance, condition, or results and involve a number of risks and uncertainties. The company's actual results could differ materially from those expressed in the forward-looking statements as a result of a number of factors, including those listed in its SEC filings. Ares Commercial Real Estate Corporation assumes no obligation to update any such forward-looking statements. During this conference call today, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance and should not be considered in isolation from or as a substitute for measures prepared in accordance with Generally Accepted Accounting Principles. These measures may not be comparable to like titled measures used by other companies. With that, I'd like to turn the call over to our CEO, Bryan Donohoe. Bryan?

Thank you, John. Good morning everyone and thank you for joining us. I'm here with Jeff Gonzales, our Chief Financial Officer; Tae-Sik Yoon, our Chief Operating Officer; as well as other members of the management and Investor Relations team. Today, we'll start off with some market commentary. A review of our accomplishments throughout 2024 and where we are focused going forward. Jeff will then take us through our fourth quarter and full year results in detail. In 2024, we witnessed a moderate recovery in the commercial real estate market with a particular acceleration of these positive trends in the second half of the year. The industry saw increased transaction volumes and stable to improving property values and fundamentals across almost the full spectrum of property types. While the office market remains challenged, we are seeing some green shoots and greater signs of stabilization, including positive net absorption in the U.S. for the fourth quarter, a first since pre-COVID. The stronger level of commercial real estate transaction activity and capital market stability aligns well with our continued focus on resolving our underperforming assets. As discussed throughout 2024, our primary objective was to address our underperforming 4 and 5 risk-weighted loans and to reduce our overall office exposure. We made solid progress in this area and acknowledge there is still more work to do. For the full year 2024, we reduced our risk rated 4 and 5 loans by approximately 34% or $182 million. As of year-end, we had five loans risk rated 4 and 5 remaining in our portfolio, totaling $357 million of outstanding principal balance. During 2024, we also reduced our office exposure, including REOs, by $151 million, representing a decline of 18% year-over-year and exited one of our three REO assets. In our view, these actions improved the overall…

Thank you, Bryan. For the fourth quarter of 2024, we reported a GAAP net loss of $10.7 million or $0.20 per common share. Our distributable earnings for the fourth quarter of 2024 was a net loss of $8.3 million or $0.15 per common share, which includes realized losses of $18 million or $0.33 per common share. This includes both the full write-off of the subordinated loan on the New Jersey office property as well as the loss on the sale of our California REO office property. For full year 2024, we reported a GAAP net loss of $35 million or $0.64 per common share and a distributable earnings loss of $44.6 million or $0.82 per common share. Focusing on the fourth quarter results, distributable earnings excluding the realized losses of $18 million was $9.7 million or $0.18 per common share. We also collected $3 million or $0.06 per common share of interest in cash on loans that were on non-accrual during the fourth quarter and thus was not recognized as income during the quarter and instead was applied to reduce our cost basis in the loans. As Bryan mentioned, we had strong repayments in the back half of 2024, particularly in the fourth quarter. Throughout 2024, we collected $350 million in repayments, nearly double what we collected as compared to 2023. Importantly, reflecting the pace of recovery in commercial real estate activity, we collected $147 million of repayments in the fourth quarter of 2024, resulting in over 75% of the annual repayments for 2024 being collected after June 30th, 2024. In terms of our loan risk ratings, the outstanding principal balance of loans with a risk rating of 4 or 5 increased 12% or $37 million in the fourth quarter. This was largely due to a $51 million senior loan…

Thanks Jeff. We've made meaningful progress on many of our goals, and we believe we've positioned our company strategically for a successful 2025. We have a stronger and healthier balance sheet, which will allow us to be in an even stronger position to address and resolve our remaining higher risk rated loans in an improving real estate market environment. We remain committed to being responsible stewards of shareholder capital, and we will seek to bring crystallization to our book value in order to enhance shareholder returns. As always, we appreciate you joining our call today and we'd be happy to open the line for questions.

[Operator Instructions] We'll hear first today from the line of Rick Shane at JPMorgan.

Hey guys, thanks for taking my questions this morning. Look, 2025 is going to be a year of transition, some acceleration of repayments, increase in deal activity, realized losses. Those seem to be the three big things to consider. I realize you can't give us specificity in terms of what each of those is going to look like. But if you can help us, think about the contours in terms of timing from half, back half of the year for each of those three, that would be really helpful.

Yes, Rick, I'll start and I appreciate the question. I'll certainly share the mic with Tae-Sik and Jeff a little bit. I think in our opening remarks, we talked about the pace of market recovery, how that accelerated into year-end. Obviously, rate rise towards the back half and beginning of this year, a little bit of headwind, but really going in the face of capital flows that I think are positive, not just the amount of capital coming into real estate, but the type. So, you've got more rational buyers entering versus kind of the vulture structure that we would typically see in down cycles. In terms of timeline, I mean, I think we touched on the 34%-odd reduction in our 4 and 5s throughout last year. And I think with the capital flows we're seeing, we would expect to maintain that pace in the first half of the year to move to a more tenable allocation towards those risk-weighted 4 and 5. And all of that kind of comes together with neutral or more neutral rate environment and those capital flows I mentioned. So, when we think about more active participation on the deployment side, I think we will like to see first that continued pace of reduction in the 4 and 5 that we were successful in accomplishing throughout the last 12-odd months.

Got it, that’s helpful. I appreciate the answer. Thank you guys.

Our next question comes from Doug Harter at UBS. Mr. Harter, your line is open sir. You may have us on mute.

Hello. Can you talk about what type of environment would be needed to pick up your pace of originations, stabilize the leverage level, and possibly increase the size of the portfolio?

Yes, certainly. I appreciate the question. I think as I mentioned in response to Rick's question, I think the continued reduction of those 4 and 5s will be catalytic to that deployment. As a platform, we were fairly active with almost $5 billion of originations last year in other non-ACRE vehicles. So, I think the takeaway there, I guess, the engine is running, and we see a market opportunity that we can or will participate in. And as we bring further clarity to some of the asset management issues we touched on, I think we'll look to begin growing the portfolio again. Given the scale of the portfolio, though, we're not talking about a huge number of assets that will perform or behave like an index. It's really as we've experienced some idiosyncratic events with assets and there's fewer and fewer of them to asset manage actively. But the goals that we set forth at the beginning of last year to create a larger cash position, reduce those allocation for those assets that are higher on the risk spectrum. I think we've accomplished those goals with a good degree of success, and we see a trendline that's positive that will certainly allow us to have the company of ACRE participate in the market opportunity that we're seeing in real-time.

And I'll just add to that. We've been very purposeful with our balance sheet positioning to give us that flexibility to resolve our 4 and 5-rated loans. So, that's continuing to be our main focus. And as Bryan mentioned, once that bucket of underperforming loans is resolved, we will -- we are going to be in a position to find accretive opportunities for us.

Great. Thank you.

Our next question will come from Jade Rahmani at KBW.

Thank you very much. Could you please discuss the Boston Life Science deal, the dynamics that are going on there? Is it a vacant project? Is it completed? And what would be the outlook there? I know life science is challenged, and there's still quite a lot of supply.

Yes, it's a good question, Jade. We appreciate it. I think what we've seen is a pivoting of some business plans, and you could apply that to this asset where given the supply growth that you've seen accelerate over the past, call it, 36 months in that Boston Life Science market and that you can trace it obviously back all the way to VC funding. But the change in that dynamic and the business plan from a full life science use to a more traditional office use, obviously, is impactful. On the one hand with respect to the tenant improvement allowance and the spend, but also ultimately on rents and valuation. So, that was the catalyst for the change in discourse around that loan. The good part is with the supply of life science being an issue. Some of the -- you've seen negative supply of some degree in traditional office utilization. So, we're working with that borrower to effectuate the best outcome. But certainly, the macro environment around that sector is much less positive than it was as our industry groups sat here three-odd years ago.

And in terms of the basis that the loan is -- since it's risk 4, I assume there's not a meaningful reserve, but the current carrying value, does it work with this change in business plan? Or is that a discussion that's currently underway? And is there any additional life science exposure?

That's the -- I mean we've got some mixed-use assets. That's really the life science exposure in the portfolio, Jade. I'd say that the situation remains fairly fluid with the sponsorship group. I think what you're seeing is that while there is long-term opportunity in enterprise value in this sector, it's a matter of what can get accomplished in the face of that supply that you mentioned. So, I think the answer is more to come on this asset, but we're in active dialogue.

And Jade, just to add on to that. As far as the reserve you mentioned, we did increase the reserve on that asset this quarter. So, we do feel we're adequately reserved as is.

Okay. And then if I could ask another question just on multi-family, broader trends. I mean the performance of multi-family this cycle has been pretty phenomenal. With a few exceptions, but generally it's held in really well. Do you think that the changes in interest rates and the outlook have any implications for multi-family credit? Or do you expect pretty resilient credit there?

Yes, I'd say, Jade, we touched on this, I think, in your Q&A last quarter to some degree, the fundamentals from a leasing perspective have been extremely positive, absorption rent growth across all the major markets in the U.S. last quarter we were pretty remarkable, as you state. I think the rate rise had two impacts and I think they really house more on the equity side rather than the debt side of the ledger. But muted transaction volume, right, where you had given those fundamental sellers that were less willing to part with assets given the change in valuations just on a direct cap basis, owing to rates. And also that fundamentals with that fall-off in supply, I think the statistic of the ratio between apartment deliveries and new starts has never been wider. So, you've positively absorbed a huge amount of supply and supply falls off a cliff from here. So, positive fundamentals really have no signs of abating going forward. But the impact of rates was certainly to mute transaction volume and the immediate term caused the valuation growth in the sector. But I think we still feel as a lender, very well-protected in the capital structure today.

Thanks a lot.

Thank you.

Our next question will come from Chris Muller at Citizens JMP.

Hey guys, thanks for taking my question. So, we saw in a recent commercial mortgage alert that you, as in Ares, expect to issue somewhere in the range of $500 million to $1 billion of CLOs in 2025 and most of that would come through the REIT here. So, I'm curious, do you guys have any thoughts on the timing there? And if it is that more $1 billion number or I guess, on the $500 million, is that something that would be split into two or more transactions? Or would you be able to get enough collateral for a larger CLO?

Yes, I'm not sure that we were as specific around which vehicles would participate necessarily. That said, we've traditionally thought about the CLO market as an opportunistic way to term out the leverage. I think as an industry group, we've seen a lot of constructive movement in terms of repo providers and really narrowing the gap between the leverage advance rate structures that you might find in a CLO execution versus traditional bank repo. And our partnership with those banks is a huge part of what we do across Ares and certainly within real estate and real estate credit. I think in terms of things we would like to see, should we pursue a CLO execution. Clearly, the market wants to see some degree of scale and diversification, both in terms of asset types, vintages, and things like that. And in order to pay the freight associated with the CLO, you're going to or want to have that scale to fray those costs a little bit. So, clearly, the capital markets movement has been positive for our sector. And if as and when the CLO market becomes attractive to us and our portfolios, we'll judiciously use it. But it is a -- I think that mechanism is a nice to have, not a must have for us and the majority of our peers.

Yes. And I'll just add, we are seeing very competitive pricing from our warehouse lenders. That is a market that they're really participating in as opposed to directly originating. So, we are -- that we do see that right now is the most attractive financing option for us.

Got it, that's very helpful. And then I think I probably know the answer to this one. But given the pickup in repays in the fourth quarter and then into the first quarter, does the magnitude of those coming in impact the timing of any new lending? And I guess what I'm trying to get at is will you guys look to replace any of that runoff with new lending? Or is it purely just waiting to get through some of those problem assets?

It certainly works in tandem. I think the cash position that we've generated, and candidly we think it's an enviable place to be, especially given what we mentioned in the opening remarks regarding that discount, the book and the amount of cash that kind of comprises our market value today. But as we work through the remaining smaller number of risk rated 4 and 5 assets alongside that very strong cash position and more moderate leverage than the industry as a whole. I think those two things together will be the prompt for further deployment and getting back to portfolio growth.

Got it. That’s really helpful. Thanks for taking the questions.

[Operator Instructions] Our next question comes from John Nickodemus at BTIG.

Good morning everyone and thanks so much for taking the question. Somewhat similar to what Chris just mentioned. Obviously, fourth quarter bought your highest repayment volume of last year. Bryan, you mentioned during your remarks that year-to-date repayments have already exceeded that quarterly level as well. So, just with that in mind and based on what visibility you do have, how should we think about your repayment trajectory for the rest of 2025?

Yes, it's a great question. And as I mentioned earlier, each of these assets behave onto themselves to some degree. But if you think about our industry in this floating rate loan origination schematic, generally, we would expect to see a three-year weighted average life on each of these assets. And those types of tenors are interrupted by the dynamic market environment, right? So, we saw with the rate rise, with the change in office, a little bit longer duration in certain assets, and I think collectively throughout our portfolio. So, there's probably some potential energy that will lead to an acceleration of those repayments. And so I think if we were to move over time to get back to that normalized three-year life of an investment, we might see as we saw in Q4 and thus far in Q1, a little bit more acceleration of that. So, our discussions with borrowers and the fact that you're seeing more capital come into the space, you see a little bit of an unnatural acceleration of those repayments throughout the course of this year and a return to more normalized cadence for new originations of assets going forward.

Great. That’s all for me. Thank you so much.

And that is all the questions we have for today, gentlemen.

Great. Well, I'll just close with just an expression of gratitude. I appreciate everybody's time today and your continued support of Ares Commercial Real Estate and we look forward to speaking with you again on our next earnings call. Thanks, everybody.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available approximately one hour after the end of the call through March 12th, 2025 to domestic callers by dialing (800) 839-2382 and to international callers by dialing (402) 220-7201. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources' section of our website. Thank you for joining. You may now disconnect.